effect of trust on intl joint ventures

Journal of International Management 13 (2007) 430 – 448

The effect of trust on international joint venture performance in China Paul Wai-Kit Ng a,1 , Chung-Ming Lau b,⁎, Mee-Kau Nyaw c,2 a

Division of Commerce, City University of Hong Kong, Kowloon Tong, Kowloon, Hong Kong b Department of Management, Chinese University of Hong Kong, Shatin, NT, Hong Kong c Lingnan University, Tuen Mun, Hong Kong Received 7 April 2005; received in revised form 16 March 2007; accepted 22 March 2007 Available online 9 November 2007

Abstract The role of trust between the parent companies of international joint ventures (IJVs) is re-examined, and it is suggested that trust between parents is not only a major predictor of the achievement of financial and non-financial goals by IJVs as reported in the literature, but also moderates the relationship between IJV performance and certain contextual factors.

Based on the responses of senior executives of IJVs and their parent companies in China, it is confirmed that trust influences IJV performance. The moderating effects of trust on the relationships between IJV performance and local reliance and the experience of executives were confirmed for the senior executive sample, but the moderating effect of cultural distance was not consistent between the firm-level and country-level measures. There was no significant result regarding these moderating relationships for the parent sample, except local reliance. © 2007 Elsevier Inc. All rights reserved.

Keywords: Trust; International joint ventures; China

1. Introduction Kogut (1988) argued that as a method of entry into a new market, a joint venture can reduce transaction costs because it enables the partners to share the ownership, revenue derived, and ⁎ Corresponding author. Tel.: +852 2609 7803; fax: +852 2603 5104.

E-mail addresses: cm011155@cityu.edu.hk (P.W.-K. Ng), cmlau@cuhk.edu.hk (C.-M. Lau), mknyaw@ln.edu.hk (M.-K. Nyaw).

1 Tel.: +852 2788 7644.

2 Tel.: +852 2616 8188.

1075-4253/$ - see front matter © 2007 Elsevier Inc. All rights reserved. doi:10.1016/j.intman.2007.03.004

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monitoring and control rights. The partner companies are also in a position of mutual hostage, which inhibits their incentive to shirk. Joint ventures are also superior to markets and hierarchies when firms face uncertainty about future development or when information is inadequate (Balakrishnan and Koza, 1993). Nevertheless, the inherent complexity of having two or more owners who may be competitors and collaborators leads to certain difficulties in management. Such problems are magnified when an international joint venture (IJV) is operating in a risky and uncertain setting in which political and opportunistic behavior is rife, as this increases the transaction costs due to increased monitoring, communication, and negotiation requirements (Beamish and Kachra, 2004; Frayne and Geringer, 1990). Thus, joint ventures can only be justified when the benefits of joining outweigh the increased governance costs and possible leakage of know-how (Beamish and Banks, 1987). Maintaining effective and efficient control over operations and sustaining the commitment of the partners are therefore the keys to the success of IJVs. In the literature, trust between partners is suggested to be an important factor that contributes to the success of IJVs (Currall and Inkpen, 2002; Inkpen and Currall, 2004; Madhok, 2006).

Beamish (1993, 2006) supported the view that trust is important for the success of joint ventures in developing countries, and as trust can be easily managed, it can be viewed as a means to facilitate the achievement of the objectives of an IJV (Sheppard and Tuchinsky, 1996). However, large-scale empirical studies on the role of trust in transitional economies have rarely been conducted (Beamish, 1993; Lane et al., 2001).

Since the government adopted an open-door policy to attract foreign investment in 1978, a large number of foreign companies have flocked to the People's Republic of China, and, despite a rising trend in wholly foreign-owned enterprises, the equity joint venture is still a major mode of business operation. IJVs now account for approximately 40% of China's total foreign investment (China Statistical Yearbook, 2005), although this has decreased from about 60% in the 1990s.

Most of the studies on the factors that affect the performance of IJVs in China are centered on environmental and market factors (Wong et al., 2003), or the resource commitment of the partners (Yan and Child, 2004). Such studies tend to emphasize the direct effects of these factors on IJV performance, but pay less attention to the evolving relationships and interactions between partners. This study therefore focuses on how trust interacts with market and organizational factors to enhance IJV performance in China.

This study investigates the trust level as it is perceived by both the senior executives of IJVs and the parent companies. This dual emphasis represents an advance in the IJV literature, as most other studies have been conducted either at the joint venture level or at the parent level only (Luo et al., 2001; Osland and Cavusgil, 1998). Furthermore, past studies of IJVs have tended to be conducted from the viewpoint of general managers, with the occasional inclusion of the viewpoint of the foreign parent when it was easy to obtain a response from that party. This study provides richer information by incorporating the expectations of the Chinese parent into the design (Mohr, 2006), and therefore goes beyond looking at the direct effects of trust between parents on IJV performance to examine the interaction of trust with certain market and organizational factors in a transitional economy context from the perspective of both general managers and the local parent.

2. Interactions of trust with organizational factors Trust has been studied from many perspectives, and remains a complex construct (Lewicki and Bunker, 1996). Rotter (1971, p. 444) defined trust as “an expectancy held by an individual or a group that the word, promise, verbal, or written statement of another individual or group can be relied on.” Mayer et al. (1995, p. 712) asserted that trust “is the willingness of a party to be

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vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor.� In the IJV literature, Parkhe (1993) specified the importance of trust on the stability and performance of IJVs. Styles and Hersch (2005) found that IJV relationships are stronger when goodwill trust develops, when the personal trust between partners increases, and when affective commitment develops.

The marketing literature also emphasizes relationships and trust, in particular, in customer and inter-firm relationships (Ambler and Styles, 2000). Moorman et al. (1993) developed the theory that the critical role of trust in facilitating exchange relationships can be extended to the trust between market researchers and their users. Grayson and Ambler (1999) further explored the role of trust in long-term relationships in marketing services, and at the firm level, Rindfleisch and Moorman (2003) found that strong trust between alliance partners resulted in fewer negative effects on customer orientation.

Currall and Inkpen (2002) recently suggested that it is necessary to pay attention to the different levels of trust in joint venture research. Although most studies on trust have focused on interpersonal trust, Zaheer et al. (1998) suggested that interpersonal trust and interorganizational trust are essentially different constructs that have a reciprocal influence on each other. They found interorganizational trust to be of greater significance in generating favorable organizational outcomes than interpersonal trust. Interpersonal trust is vulnerable to changes in key personnel and the possible breakdown of interpersonal relationships (Dodgson, 1993), and thus to maintain long-term collaboration between business partners, trust should be embedded within the norms and values of an organization. Boersma et al. (2003) developed a process model of trust building in IJVs, and found that different types of trust play different roles in the process. This study focuses on trust at the firm level.

Although it is commonly accepted that trust is a critical variable in the success of IJVs (Beamish, 1993; Fryxell et al., 2002), it may have different effects on outcomes depending on the internal and environmental factors with which it interacts. Zaheer and Zaheer (2006) argued that levels of trust differ across international borders, and hence both the nature of trust and the institutional and cultural support for trust can vary across national contexts. They developed a model that suggests that collaborative partners from different countries are likely to bring either symmetric or asymmetric conceptions of trust to a business relationship, and thus the effect of trust on firm performance is not always a direct relationship.

Fryxell et al. (2002) found that the reliance on formal control mechanisms and the perceptions of general managers of IJV performance are positively related in younger IJVs, but negatively related in more mature IJVs. This suggests that age and partner trust have moderating effects on the relationship between control mechanisms and perceptions of performance. Dhanaraj et al.

(2004) found the transfer of tacit knowledge in IJVs to be a function of trust and shared values and systems. Cultural misunderstanding is a particular problem that can be expected with joint ventures (Baird et al., 1990), but the risk of this is attenuated if there is a high degree of trust between the parent companies. Similarly, Li and Scullion (2006) also found that trust facilitates knowledge transfer across borders in MNCs, which suggests that trust can moderate the effects of certain factors on IJV performance. In other words, the effect of these factors on IJV performance and other outcomes depends on the degree of trust that is built up between the parent companies.

The level of trust therefore interacts with certain organizational factors to affect IJV outcome.

It is proposed that the effects of certain key organizational variables on IJV performance are moderated by trust between parents. More specifically, the moderating effects of trust on the relationships between IJV performance and local reliance, cultural distance, and CEO experience are examined.

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3. Trust in IJVs In certain instances, contractual and bureaucratic arrangements may not be as useful as mutual trust in controlling the opportunistic behavior of the other party in a business relationship. Yan and Gray (1994, 1996) suggested that trust (inter-partner working relationship) may help to achieve the objectives of both of the parent companies in an IJV, and Baird et al. (1990) found trust to be ranked first among the factors that lead to successful joint ventures in a study of Chinese and U.S. middle-level managers. In fact, as a soft variable, trust can be regarded as a complement to other structural variables (Katsikeas, 1998). In IJVs, trust may be an informal control mechanism that supplements deficiencies in the formal control system (Luo et al., 2001).

Yan and Gray (1994) also emphasized that trust can modify the influence of dominant partner control on the performance of an IJV. When trust is properly built up, it can also enhance the social capital of firms, and hence create value (Tsai and Ghoshal, 1998). Recently, Li et al. (2006) also found that the development of trust in overseas headquarters among local senior managers in uncertain environments is important for IJV performance, and Wang and Nicholas (2005) suggested that process-based trust affects the performance of contractual joint ventures. Thus, in line with the literature, we posit that trust can be regarded as one of the key variables that determine whether the objectives of an IJV are successfully achieved.

In general, we hypothesize that a higher level of trust between IJV parents will lead to better IJV performance.

Hypothesis 1. The level of trust between IJV parents is positively related to IJV performance.

To explore this relationship further, several important environmental and organizational variables that may interact with trust in IJVs are examined, namely, local reliance, cultural distance, and the experience of executives.

3.1. Local reliance Geographical location choice is assumed to be an important decision in setting up a joint venture. However, the question of whether location really makes a difference to a firm's success remains unanswered. Hu and Chen (1996) found that in transitional economies, joint ventures that are located in cities with better economic conditions and tax incentives normally enjoy a higher rate of success than those that are established in other coastal regions and inland provinces. It has also been found that foreign partners are more willing to acquire a greater equity ownership in IJVs that are located in large metropolitan cities (Pan, 1996), probably because more developed cities such as those in special economic zones involve less risk (Shan, 1991). Vanhonacker and Pan (1997), however, suggested that geographical location does not reduce the operational problems that face equity joint ventures, and concluded that each region has its own problems. We must therefore go beyond geographical location per se, and examine the associated contextual factors.

Two market-related contextual factors (customers and suppliers) are generally considered to have a great influence on choice of location, and indeed the nature of the local market and the proximity of raw material supplies are the primary factors in many IJV decisions (Hitt et al., 2000; Inkpen and Beamish, 1997; Vanhonacker and Pan, 1997). A greater dependence on the local environment implies a higher exposure to uncertainty and risk (Shan, 1991). It has been found that U.S. and European managers are more deeply troubled by reliable sourcing in China than managers of other Asian IJVs (Vanhonacker and Pan, 1997). Thus, relying more on local customers and suppliers

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creates a more risky situation. It would seem that reliance on local markets and local raw material supplies is a typical situation in which strong trust between partners is required. When the operating environment is highly uncertain and the contributions of all of the parent companies are essential for success, trust and cooperation between IJV parents are therefore indispensable (Aulakh et al., 1996).

A greater reliance on local raw material supplies also means that the contribution of the local partner is relatively more critical (Jolly, 2005). In this situation, the interaction between parents is an important factor that determines the performance of joint ventures. A higher level of trust between IJV parents means that such uncertain situations can be tackled more effectively, which reduces the risk between parents and therefore improves IJV performance. Conversely, if the level of trust is low, then the relationship is more fragile. The risks of local reliance (i.e., on local markets and suppliers) can therefore be lessened through the establishment of a higher level of trust between parents. We therefore hypothesize that the impact of local reliance on the performance of IJVs is a function of the level of trust between parents. Trust can therefore be said to be a moderator of the relationship between local reliance and IJV performance.

Hypothesis 2. The effect of local reliance (i.e., on local markets and suppliers) on IJV performance is moderated by the level of trust between parents, with local reliance having a more positive effect on IJV performance when the level of trust is higher.

3.2. Cultural distance Cultural background influences management style and conflict-handling strategies (Lin and Germain, 1998). Among the many inter-partner relationships that have been studied, cultural distance has received the greatest attention, especially in relation to IJVs. Most of the cultural distance issues that have been studied, such as entry mode (Kogut and Singh, 1988), partner control (Gomes-Casseres, 1989), goal divergence (Yan and Gray, 1994), and joint venture longevity (Hennart and Zeng, 2002), are based on differences in culture. A greater cultural distance may hinder the board of directors from setting up a well-defined and integrated management system to govern the executives of IJVs, which leads to greater role conflict and ambiguity for the executives (Frayne and Geringer, 1993; Schaan and Beamish, 1988; Shenkar and Zeira, 1992) and poorer firm performance. The cultural compatibility of the parent companies is therefore an element that substantially influences IJV performance (Lane et al., 2001).

Although the cultural distance between the parents affects IJV performance, it may be mitigated by the existence of trust. Trust between foreign and local parents facilitates cooperation, and thus gives an IJV a better chance of success.

Notwithstanding Shenkar's (2001) critique of the cultural distance construct and the possible issues with country-level measurement (Mezias et al., 2002), the effects of differences in culture on various joint venture issues have been widely studied. Studies in this area have explored cultural differences between U.S. and European IJVs (Brown et al., 1989) and between Chinese and Hungarian IJVs (Child and Markoczy, 1993). Comparing the cultural and governmental background of Chinese and Hungarian IJVs, Child and Markoczy (1993) found that the cultural values and vestigial influences of the centralized planning economy in both countries accounted for the low efficiency of Chinese managers and the difficulties that were encountered in managing joint ventures. A higher level of cultural distance means greater risk, to the extent that foreign parents may reduce their shareholding to avoid such risk (Kogut and Singh, 1988).

Shenkar (1990) suggested that one of the major problems that confront IJVs in transitional economies is environmental diversity, by which is meant the differences between parent

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companies in terms of political, economic, cultural, and legal environments. Baird et al. (1990) also found cultural misunderstanding to be a common problem in joint ventures. Brunner et al.

(1992) suggested that the major problems that U.S. investors face are lack of knowledge about the Chinese way of doing business and unfamiliarity with the relationship game. Although Fan (1998) argued that overseas Chinese have a competitive advantage in investing in China, not all studies have found evidence that cultural similarity is an advantage. For example, Hu and Chen (1996) found that Sino-U.S. joint ventures outperformed others, and Vanhonacker and Pan (1997) noted that the national culture of the parents does not affect the difficulties that are faced by IJVs. It is obvious from these arguments that generalized and simplified cultural difference hypotheses alone cannot adequately explain the influence of cultural on IJVs (Shenkar, 2001).

Although there is a possibly negative relationship between the cultural distance between parents and IJV performance, there may be some organizational factors that alleviate the problem. A moderating variable such as trust between parents may well provide a clearer picture of the impact of culture on IJV performance. For example, culturally speaking, Chinese people often emphasize trust and relationships, and thus are more motivated to cooperate when there is a high level of trust between parents. The need for tight control between parents in a situation of a large cultural distance is thus reduced when there is higher level of trust.

The foregoing discussion implies that trust between parents has a moderating effect on the relationship between the performance of IJVs and the cultural distance between parent companies.

Hypothesis 3. The effect of cultural distance on firm performance is moderated by the level of trust between parents, with cultural distance having a less negative effect on IJV performance when the level of trust is higher.

3.3. Experience of executives The experience of the senior management has a strong effect on firm performance. Frayne and Geringer (1995) noted that foreign general managers face such challenges as divided loyalty, pressure for a quick response, the presence of multiple parents, limited preparation and support, and excessive responsibility. Shenkar and Zeira (1992) noted that IJV general managers suffer from serious role conflict and ambiguities, with overcommitment to one parent often leading to the rebellion of the other parent. The general manager can be considered to be the agent of the parents in managing an IJV. According to agency theory, agents are more risk-averse than principals, as they have invested themselves wholly in the company, whereas the shareholders of the parents can diversify their stakes (Eisenhardt, 1989). This situation may be even worse when there is a high level of uncertainty caused by conflict between parents.

It has been found that the self-efficacy of the general manager has a positive effect on the performance of IJVs (Frayne and Geringer, 1993; Prussia et al., 1998), but the capability of senior executives can only be fully realized if the partners cooperate with each other. Fryxell et al. (2004) suggested that the localization of top managers is a key element in the strategic implementation of MNCs in China, and thus the personal effectiveness of general managers is an important consideration. Normally, knowledge about both the local context and the industry is needed for this role in an emerging economy (Li and Scullion, 2006; Wang and Nicholas, 2005). General managers are also more effective when they have more experience of joint ventures, especially in their own industry.

Although experienced executives alone can generate better performance, they will be more productive still when there is also trust between parents. As many experienced executives of IJVs are

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local people who are culturally more sensitive to the influence of trust, especially in transitional economies, they are likely to be more effective when the level of trust between parents is high (Jolly, 2005). In other words, their effectiveness should be enhanced by the presence of trust between the parent companies.

We therefore hypothesize that experienced executives will be more effective when the level of trust between parents is high.

Hypothesis 4. The positive relationship between the experience of senior executives and IJV performance is moderated by the level of trust between parents, with the relationship being stronger when the level of trust is higher.

4. Methodology 4.1. Sample and data collection The sample of this study comprises a group of IJVs in China. As China is still in a period of economic transition and both economic and business conditions are highly uncertain, trust is expected to be a key variable in the success of IJVs (Chen and Boggs, 1998; Worm and Frankenstein, 2000). In addition, Chinese culture emphasizes trust and mutual respect, and the rule of man is promoted over the rule of law (Hofstede, 1991). Thus, Chinese IJVs are appropriate to test our hypotheses.

The IJVs were located in three major coastal regions: Guangdong, Beijing and Tianjin, and Shanghai. Firms were selected from among those registered in the cities according to firm size and the capital origin of the parent firm. Only IJVs with foreign investors from Hong Kong, the United States, Japan, and Taiwan were included, as it is from these four countries or areas that most of the companies that have formed joint ventures in China over the last two decades have originated. Moreover, they represent a broad range of cultural distance from China, which facilitates the comparison of the implications of cultural distance on IJV performance. Joint ventures with companies from Hong Kong were included in our sample because Hong Kong firms have the largest number of joint ventures in China. If Hong Kong companies were excluded, then the joint ventures sample would be biased. Furthermore, Hong Kong is presumably culturally closer to China, and thus the inclusion of Hong Kong IJVs should provide a good contrast with IJVs that involve firms from the United States and Japan, which are more culturally distinct. To control for industry effects and firm size, only IJVs in the manufacturing industries (the largest category of IJVs in China) with more than 200 employees were included.

Furthermore, only IJVs with three or more years of operational history in China were sampled to achieve a more valid assessment of inter-partner relationship and firm performance.

Two sets of responses were received from the sampled IJVs: one from the chief executives of the IJVs and the other from the senior managers of the Chinese parent companies. This approach not only reduces the common method variance that is caused by single source bias (Avolio et al., 1991), but also provides more information with which to triangulate the findings. The parent sample also helps in the development of a more comprehensive understanding of the effect of trust on firm performance from the point of view of different constituencies.

The data were collected through a questionnaire survey that was conducted in person by field investigators. The field investigators comprised the first author and three professors from the cities under study, accompanied by graduate students. The respondents were staff members who were actively engaged in the operations of the IJV and were able to provide reliable views of the level of trust between parents and the perceived success of their IJV.

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The questionnaire was translated into Chinese by a professional translator, and then backtranslated to ensure validity. A pilot test with thirty firms in Guangdong province (southern China) was conducted first, which resulted in some minor revisions to the survey. In the main, the chief executive (either a general manager or deputy general manager) of each firm was interviewed. The original English-language questionnaire was used for English-speaking respondents. Follow-up telephone calls were made to ensure the completeness and reliability of the responses.

The same questionnaire with identical items was then administered to the IJV senior executives and managers of the Chinese parent companies in the main sample, with only a few slight changes in wording to cater to this set of respondents. The responses from the parent firm are important, as IJVs have multiple constituencies that may have different expectations (Mohr, 2006).

A total of 310 IJV senior executives were surveyed, and 298 valid responses were collected. Of these responses, 120 were from Beijing and Tianjin, 118 from Shanghai, and 60 from Guangdong.

A total of 210 parent companies were interviewed, with 178 valid responses. When the respondent from the Chinese parent company was also the senior executive of the IJV, the corresponding parent response was deleted from the sample. Of the valid responses, 70 were from Beijing and Tianjin, 68 from Shanghai, and 40 from Guangdong.

4.2. Measurement Trust between Parents. The 14-item scale that was used to capture the relationships between IJV parents was adapted and modified from the scale of Sheppard and Tuchinsky (1996). The alpha of the scale in this study was 0.89. The scale items are listed in the Appendix.

4.2.1. Cultural distance It has been suggested that a firm-level measurement of cultural distance is better than a country-level measurement (Mezias et al., 2002). Three items that were adapted from the study of Mjoen and Tallman (1997) were used to measure the perceptions of cultural distance between the Chinese and the foreign parents. This firm-level measure of cultural distance had an alpha of 0.79 and a high reliability. It is a straightforward measure, and does not suffer from confounding issues such as those in the national level measures, as highlighted by Shenkar (2001) and Mezias et al.

(2002). However, as the country-level cultural distance measure, such as the index employed by Kogut and Singh (1988) has been widely adopted in many studies, we also measure country-level cultural distance in order to triangulate the results. The country-level measure is computed using Kogut and Singh's (1988) formula, but with all five Hofstede cultural dimensions.

4.2.2. Local reliance This four-item scale was developed specifically for this study to reflect reliance on the local market and raw materials suppliers. The alpha of this scale was 0.80. The scale items are listed in the Appendix.

4.2.3. Experience of executives The number of years of service of the senior managers in the industry and their tenure at their IJV in China were taken to be indicators of their experiences in the field. A composite index was developed by adding the total years of experience to reflect how seasoned the executives were in joint venture operations.

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4.2.4. Control variables The number of full-time staff employed by the IJV was used to control for the size of the IJV. The history of the IJV was controlled in terms of the number of years of operation. The industries in which the IJVs were engaged were classified into heavy, medium, and light industries based on the Chinese government's industry code system. Industry was therefore controlled by using two dummy variables to represent heavy industry and light industry, with medium industry as the reference group. As the sample was drawn from three locations (Beijing and Tianjin, Shanghai, and Guangdong), two dummy variables were used to represent Beijing and Tianjin, and Shanghai, respectively, and Guangdong was used as the reference group. The ownership of the IJVs was also considered (Beamish and Jiang, 2002). We created a dummy variable to represent investment from Hong Kong parent companies, and also controlled the relative percentage share of the Chinese parent in each IJV. Finally, the number of parents was also controlled, as this may affect the interaction among the parents.

4.2.5. Performance of the IJV IJV performance was measured in terms of how well the interests of the parents were served.

As Yan and Gray (1994) suggested, an IJV may perform well in terms of financial criteria, but there may be bad feeling between the parents if the objectives of one have been overlooked. Based on previous work (Mjoen and Tallman, 1997; Yan and Gray, 1994), a composite measure was developed to cover the various possible objectives that are commonly set by the parents of IJVs in China. The respondents were asked to rate the degree to which their IJV had achieved these goals on a seven-point Likert scale. The items were divided into financial and non-financial achievements. The financial goals included profit, sales in local and foreign markets, and market share, and the non-financial goals comprised product quality, the acquisition of management skills, technology transfer, and the promotion of cooperation among the parties involved. A weight was used to account for the importance of these goals to the parents, and two weighted average scores were computed for the achievement of the financial and non-financial goals to represent IJV performance.

4.3. Analysis Hierarchical regression analysis was used to test the hypotheses. The control variables, including industry, year of operation, size, location, share of Chinese ownership, Hong Kong parent, and number of parents, were first entered as a block. In the second step, the contextual factors and trust were entered as independent variables. Finally, the two-way interaction items between trust and the contextual variables were entered to test the moderating effects. As Cohen and Cohen (1983) pointed out, interaction terms are understood as a joint relationship with the dependent variable, and thus the significance of this joint effect implies the existence of a moderating effect. The moderating effect of trust is therefore represented by the interaction terms that are created by multiplying trust with the other variables. Separate regression analyses were carried out for the two samples, financial and non-financial indicators of IJV performance, as well as the two cultural distance measures.

5. Results To check for the possible impact of the different origins of the foreign parent companies on the achievement of the IJV objectives, a one-way ANOVA analysis was conducted, but no significant

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country origin effect was identified. This is also supported by the insignificant correlation between the achievement of the financial and the non-financial objectives and the Hong Kong parent dummy variable. Thus, all of the sampled IJVs can be analyzed together.

Table 1 shows the means, standard deviations, intercorrelations, and reliability coefficients of all of the variables that were used for the responses from the executives of the IJVs. The highest correlation coefficient between trust and the contextual factors was-0.126, which is only a smallsized effect. Few of the contextual variables had any relationship with each other, and the financial and non-financial indicators of IJV performance showed only slight intercorrelations.

The correlation between the two cultural distance measures is moderate, at 0.386.

Table 2a and b show the results of the hierarchical regression analyses for the two performance measures for the IJV senior executive sample for firm-level and country-level cultural distance respectively. Most of the control variables were not significant. For the financial goals, only the number of parents was significant at the 0.1 level. The location dummy variable, Shanghai, was significant for the non-financial goals, which implies that the IJVs in Shanghai tended to have lower achievements in terms of non-financial goals than the IJVs in Beijing and Tianjin and Guangdong.

After the control variables, trust between parents was entered together with other variables, and there was a significant increase in the variance explained in both cases. Trust was found to be significant for both the financial and non-financial goals, and in both firm-level and country-level cultural distance measures, and hence H1 is supported.

The results for the three organizational factors showed local reliance and the experience of executives were found to be significant for both the financial goals and non-financial goals, and in both measures. However, although local reliance was positively related to the achievement of goals, the relationship with experience was negative. The firm-level cultural distance was marginally significant for the non-financial goals only, while country-level cultural distance was significant (positive) for the achievement of financial goals.

The interaction terms were then entered, and the ensuing results are shown in Model 3 and Model 6 of Table 2a and b. In terms of the achievement of financial goals, the interactions between trust and local reliance and trust and the experience of executives were both positive and significant. In terms of the achievement of non-financial goals, only the relationship between trust and local reliance was significant. The main effects of trust were absorbed by the interaction terms (Cohen and Cohen, 1983). This shows that trust has a moderating effect on the relationship between local reliance and the achievement of goals, and thus H2 is confirmed. The firm-level cultural distance interactions were not significant in either case, and hence H3 is not confirmed.

H4 is supported for the achievement of financial goals only. The predicted directions of the moderating effects were confirmed by plotting the interactions on graphs.

For the analyses using country-level cultural distance measures as shown in Table 2b, the only difference is the interaction between trust and cultural distance (Model 3), which is significant and positive for the achievement of financial goals. Thus, H3 is partially supported. The other interaction terms remained the same.

A second set of analyses was conducted to examine the effects of trust from the perspective of the Chinese parent companies. Table 3a and b show the results of the hierarchical regression of firm-level and country-level cultural distance measures respectively. Similar to the findings from the IJV senior executive sample, most of the control variables were not significant. Trust alone was significantly and positively related to the achievement of both financial and non-financial goals and in both cases, and thus H1 is supported. Local reliance had a positive effect on both performance measures and in both measures, but the experience of the general managers was

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1. Year 2. Light Industry 3. Heavy Industry 4. Beijing and Tianjin 5. Shanghai 6. Number of parents 7. Size 8. Chinese share 9. Trust 10. Cultural distance (firm level) 11. Cultural distance (country level) 12. Local reliance 13. Experience 14. Hong Kong parent 15. Financial goals 16. Non-financial goals

Mean

S.D.

1

2

3

4

5

6

7

8

9

10

6.059 0.37 0.36 0.38 0.40 2.23 612 43.64 4.672 4.166

3.07 0.48 0.48 0.49 0.49 0.55 1010 19.47 0.77 1.40

.080 −.012 −.519⁎⁎ .290⁎⁎ .081 .265⁎⁎ .115⁎ .112 −.073

− .577⁎⁎ − .178⁎ .117⁎ .029 − .080 .042 .091 − .008

.015 .027 −.035 .155⁎⁎ .011 −.093 .019

−.646⁎⁎ .020 −.153⁎⁎ −.039 −.056 .036

.077 .014 .198⁎⁎ −.194⁎⁎ −.016

.069 −.109 −.037 −.028.

− .013 .043 .154⁎⁎

−.070 .051

(.891) −.126⁎

(.794)

.103

−.070

.033

−.037

−.104

.386⁎⁎

.163⁎⁎ .315⁎⁎ .144⁎ −.065 −.149⁎

.053 −.102 .082 .296⁎⁎ .400⁎⁎

−.086 −.059 −.288⁎⁎ −.028 .061

1.93

1.63

− .046

− .085

.148⁎

5.378 15.17 0.36 9.383 9.678

1.26 7.11 0.48 1.73 1.66

−.064 .055 .116⁎ .039 .008

− .069 .032 .147⁎ .042 − .040

−.011 −.048 −.167⁎⁎ −.064 .055

The coefficient alphas are shown in brackets after each scale. ⁎p b .05, ⁎⁎p b .01.

.151⁎⁎ .221⁎⁎ .098 −.172⁎⁎ −.096 .019

−.096 .130⁎ −.058 .103 −.162⁎⁎

.059 .107 .041 .119⁎ .032

.019 − .063 .022 .010 .058

11

12

13

14

15

.024 −.005 −.780⁎⁎ .065 .043

(.802) .120⁎ .003 .156⁎⁎ .090

.029 −.116⁎ −.181⁎⁎

− .007 − .038

.488⁎⁎

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Table 1 Means, standard deviations, and intercorrelations of the key variables in the sample of IJV senior executives

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Table 2 Achievement of Financial Goals

Achievement of Non-financial Goals

Model 1

Model 4

Model 2

Model 3

Model 5

Model 6

a. Results of the hierarchical regression: senior executives sample and firm-level cultural distance Year of operation − .007 −.007 − .008 − .001 − .006 Light industry − .019 −.06 .048 .0358 .012 Heavy industry − .291 −.210 − .083 .179 .298 Beijing and Tianjin − .194 .162 .077 − .489 − .169 Shanghai .211 .799⁎⁎ .690⁎ − .831⁎⁎ − .315 Size of IJV .00002 −.00009 − .0001 .00008 − .00001 Number of parents .311+ .334+ .335+ .133 .155 HK parent − .071 −.008 .062 − .158 − .024 Share of Chinese ownership − .005 −.004 − .003 − .009 − .009+ ⁎⁎ Trust .750 − 1.100 .848⁎⁎ Local reliance .219⁎⁎ − .742+ .187⁎ Cultural distance (firm) .038 .030 .138+ Experience −.029⁎ − .262⁎⁎ − .030⁎ Trust × local reliance .210⁎ Trust × cultural distance − .004 Trust × experience .05⁎⁎ ΔR2 .030 .140⁎⁎ .044⁎⁎ .059+ .177⁎⁎ 2 .030 .170 .215 .059 .236 R 5.962⁎⁎ F-values .946 4.279⁎⁎ 4.576⁎⁎ 1.789+

− .013 .074 .375 − .279 − .420 − .00001 .158 .014 − .008 − .414 − .775+ .254 − .114 .209⁎ − .029 .019 .024⁎ .260 5.452⁎⁎

b. Results of the hierarchical regression: senior executives sample and country-level cultural distance Year of operation − .008 −.018 − .018 − .001 − .019 Light industry − .061 −.124 .0005 .051 .032 Heavy industry − .293 −.236 − .159 .185 .260 Beijing and Tianjin − .219 .027 − .135 − .478 − .255 − .839⁎⁎ − .427 Shanghai .234 .726⁎ .518+ Size of IJV .00002 −.00008 − .00013 .00008 .00003 Number of parents .315+ .371⁎ .391⁎ .131 .168 HK parent − .041 .464 .462 − .171 .083 Share of Chinese ownership − .006 −.005 − .003 − .008 − .0071 Trust .748⁎⁎ − 1.494⁎⁎ .818⁎⁎ Local reliance .218⁎⁎ − .770+ .167⁎ .102 Cultural distance (country) .188⁎ − .650+ Experience −.030⁎ − .285⁎⁎ − .030⁎ Trust × local reliance .213⁎ Trust × cultural distance .174⁎ Trust × experience .054⁎⁎ ΔR2 .033 .153⁎⁎ .055⁎⁎ .059+ .167⁎⁎ 2 R .033 .186 .241 .059 .226 F-values 1.047 4.805⁎⁎ 5.363⁎⁎ 1.785 5.686⁎⁎

− .022 .084 .349 − .325 − .493+ .00002 .165 .098 − .007 − .512 − .926⁎ .411 − .09 .238⁎ − .069 .014 .028⁎ .254 5.330⁎⁎

Note: +p b .1; ⁎p b 0.05; ⁎⁎p b 0.01.

found to be only marginally influential, unlike in the senior executive sample. Firm-level cultural distance remained insignificant, but country-level cultural distance was significant in the achievement of non-financial goals.

When the interaction terms between trust and the contextual factors were entered, only the relationship between trust and local reliance was significant for the achievement of the nonfinancial goals, and all of the other relationships were not so significant (two others were

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Table 3 Achievement of Financial Goals

Achievement of Non-financial Goals

Model 1

Model 4

Model 2

Model 3

Model 5

Model 6

a. Results of the hierarchical regression: Chinese parent sample and firm-level cultural distance Year of operation .047 .033 .026 − .037 − .048 Light industry .270 .289 .301 .008 .055 Heavy industry − .223 .115 .164 − .301 .082 Beijing and Tianjin − .306 .274 .190 − .661+ − .107 Shanghai − .493 − .051 − .137 − .852⁎ − .358 Size − .00003 − .00019 − .0002 .00004 − .0001 Number of parents .241 .306 .291 .013 .129 HK parent − .474+ − .242 − .194 − .679⁎ − .413+ Share of Chinese ownership .004 .004 .004 .003 .002 Trust .793⁎⁎ − .669 .872⁎⁎ Local reliance .298⁎⁎ − .638 .289⁎⁎ Cultural distance (firm) .048 .226 .07 Experience − .030+ − .199+ − .031+ Trust × local reliance .202 Trust × cultural distance − .039 Trust × experience .036 ΔR2 .064 .167⁎⁎ .031+ .065 .197⁎⁎ 2 R .064 .231 .262 .065 .262 F-values 1.225 3.619⁎⁎ 3.415⁎⁎ 1.190 4.094⁎⁎

−.055 .081 .062 −.132 −.352 −.0001 .131 −.393 .002 −.405 −.863 .240 −.075 .238+ −.033 .009 .019 .281 3.590⁎⁎

b. Results of the hierarchical regression: Chinese parent sample and country-level cultural distance Year of operation .047 .025 .021 − .037 − .068+ Light industry .270 .259 .275 .008 − .055 Heavy industry − .223 .077 .116 − .301 − .015 Beijing and Tianjin − .306 .217 .119 − .661+ − .286 Shanghai − .493 − .117 − .196 − .852⁎ − .581 Size − .00003 − .00017 − .0002 .00004 − .0001 Number of parents .241 .325 .314 .013 .187 HK parent − .474+ − .055 − .078 − .679⁎ .233 Share of Chinese ownership .004 .004 .004 .003 .001 Trust .777⁎⁎ − .890 .841⁎⁎ Local reliance .296⁎⁎ − .637 .285⁎⁎ Cultural distance (country) .091 − .041 .286⁎⁎ Experience − .031+ − .208⁎ − .031+ Trust x local reliance .200 Trust × cultural distance .023 Trust × experience .038+ ΔR2 .064 .168⁎⁎ .030 .065 .228⁎⁎ R2 .064 .232 .262 .065 .293 F-values 1.225 3.650⁎⁎ 3.414⁎⁎ 1.190 4.792⁎⁎

−.075+ −.036 −.034 −.305 −.571 −.00008 .187 .264 .0002 −.503 −.906 .425 −.053 .247⁎ −.028 .005 .019 .313 4.185⁎⁎

Note: +p b .1; ⁎p b 0.05; ⁎⁎p b 0.01.

marginally significant). This means that H2 is partially confirmed, while H3 and H4 are not confirmed in this sample.

6. Discussion and conclusion The foregoing analysis confirms that trust has a significant effect on the achievement of IJV goals from the perspective of both the senior executives of the IJVs and the managers of

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the Chinese parent companies, which is consistent with the findings in the literature. The effect of local reliance on IJV performance is also confirmed. The moderating effects of trust on the three relationships are only partially supported, and different results between the Chinese parent company managers and senior executives were observed.

The impact of trust by itself is confirmed to contribute to the financial and non-financial performance of IJVs. However, the influence of trust seems to be more obvious when an IJV is faced with an uncertain environment in which the contribution of the local partner is of paramount importance. This kind of environment is characterized by the degree to which the IJV relies on local market development and the local supply of materials. We found that trust has not only a direct effect on IJV performance, but also an interacting effect on local reliance.

Trust also interacted significantly with the experience of general managers in the achievement of financial goals from the perspective of senior executives, but not from the point of view of the Chinese parents. In terms of the achievement of non-financial objectives, the experience of general managers turned out to be less effective in both samples, even with strong trust between parents. Finally, the influence of trust was found not to be significantly reflected in IJV performance even when the parents were culturally compatible with each other. It has been argued that cultural distance is an important factor in alliance performance, but this assertion is only partially confirmed in this study. Rather, our results echo those of many previous research studies in finding that the impact of the cultural distance between parents is mixed and unclear. Empirically, we did not find trust to moderate this relationship consistently using both firm-level and country-level measures. Management control and inter-firm learning may have reduced the problem of cultural distance (Inkpen and Currall, 2004), which may have dampened the effects of trust, or it may be that our sample was not sufficiently varied especially in terms of country-level cultural distance to give a meaningful result.

Many studies of the success or failure of IJVs in China have focused on the main effects of environmental, partner-related, and market factors. However, many of these findings are either contradictory or inconclusive. This study demonstrates that the main effects of the contextual and organizational variables alone are not sufficient to explain the performance of IJVs. The findings indicate that trust between parents is a factor that contributes to the success of IJVs, and also enhances the explanatory power of some contextual variables.

Researchers are aware that the different parties in an IJV may have different views of the criteria for IJV success (Osland and Cavusgil, 1998). However, few studies have examined the problems of IJVs from the angle of both parents. In this study, in addition to the responses of IJV executives, the views of the Chinese parent companies were also investigated, and the results show that, despite similarities between the perceptions of the two groups of the effect of trust in different contingent situations, there are also some discrepancies. It is plausible that these differences stem from the differing interests and focuses of the executives and parents (Mohr, 2006), as different expectations would lead them to afford trust different degrees of importance in resolving cultural differences and attenuating risks. Future research is needed to examine this issue more thoroughly.

Most of the previous studies on joint ventures in China have been descriptive and normative, and many were conducted on Chinese-U.S. joint ventures. Joint ventures formed with investors from Hong Kong and Taiwan have largely been neglected, despite the significant amount of investment in China from these two places. This study is therefore able

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to make inroads into this under-explored area by providing findings on joint ventures that have been formed between Chinese partners and overseas investors from Hong Kong and Taiwan, along with those from Japan and the United States.

6.1. Limitations and future research Approximately 33% of the sample comprised Hong Kong investments, and 18% of the sample, Taiwan investments. Although the country-origin effect on the dependent variables was not detected in the ANOVA analysis, the strong presence of Hong Kong-invested IJVs may have introduced some bias. For example, Hong Kong IJVs are normally not as large as U.S. and Japanese IJVs. Shenkar (2001) argues that the construct of cultural distance in itself may not be symmetrical, stable, or linear. In this study, the firm-level cultural distance was measured using two sources, that is, the chief executives of the IJVs and the senior managers of the Chinese parent companies, but although this is a step forward, the perspective of the foreign parent should also be sought. The results are by and large very consistent between the two measures which also demonstrate the robustness of the relationships. Moreover, there is currently no globally accepted measure of cultural distance, and hence further refinement of the scale or the use of multiple firm-level measures is needed in future studies. For example, the trust between parents could be supplemented by qualitative observations, documentation, or records of events gathered from secondary data.

Methodologically, we sampled IJVs with three years or more of experience, because they are likely to be at a relatively stable stage. Thus, we were able to eliminate inefficient joint ventures that failed within the first few years, but at the expense of a survival bias. As trust between parents was based solely on individual-level responses, future studies could consider using a non-attitudinal measure to triangulate this measurement of trust. Moreover, the current data do not have much information about the parents and management of the IJVs, such as the number of expatriates and the culture background of the partners, but these factors may affect the knowledge transfer and learning within an IJV and hence its performance.

In addition, the level of trust that is perceived by Chinese parents may not be the same as that which is perceived by foreign parents. This study is able to confirm that trust had similar effects on IJV performance in both the senior executive and Chinese parent samples, but cannot be certain about the perspective of foreign partners. Again, multiple measures from different parties are called for. IJV performance is also a function of the similarities among parents. Fey and Beamish (2001) suggested that, in addition to cultural distance, a dissimilarity in organizational climate affects IJV performance. Future investigation could therefore be undertaken of the perceptions of foreign investors in IJVs to allow a more comprehensive and meaningful comparison of the three parties.

Several directions are proposed to examine the interaction effects between contextual situations and trust between parents on the performance of IJVs in China. The trust between parents has been found to have a significant effect on the success of IJVs, but the way in which trust can be established is still largely unstudied among IJVs in China. Future research could focus on the antecedents to the establishment of trust and the factors that facilitate the development of trust between parents. A process view could be adopted to analyze the effect of trust on the development and success of IJVs. The suggestion of a causal relationship between trust and IJV performance rests on the assumption that performance will not be enhanced without sufficient trust among partners. However, it is possible that better IJV

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performance reinforces the trust between partners, and such iterative effects warrant future examination, perhaps using a longitudinal approach to trace the development of trust over time. The different levels of trust between partners are also worth future study (Currall and Inkpen, 2002). Recently, Yan and Duan (2003) suggested that there are several dimensions of interpartner fit that could affect IJV performance in China, and it is therefore relevant to include the different forms of trust in this line of inquiry.

Appendix: Measurement items Trust between Parents [Please indicate the extent to which you agree with the following statements describing the relationship between the parents of your company.].

1. Each parent knows that the other parents will consider its concerns when making decisions.

2. The quality of communication between the parents is extremely good.

3. The parents discuss the critical issues of their relationship well.

4. There is frequent contact between the representatives of the parents.

5. The parents have a long history of cooperative relationship.

6. Each parent expects to interact with the other parent for a long time in the future.

7. The goals of the parents are the same.

8. The parents view the world in the same way.

9. The parents benefit from having the same objectives.

10. The parents frequently think of each other as members of the same group.

11. The parents engage in many shared activities.

12. Each parent knows well the people who are important to the other parent (e.g., the other parent's major suppliers).

13. The parents understand well the bases of each other's success.

14. The parents understand each other's primary problems at work.

Local Reliance [Please indicate your answers to the following four questions on a scale of 1 to 7].

1. Please indicate the importance of the local market to the total sales of your company at present.

2. How important is it for your company's future development to expand into the local market?

3. Presently, how important is the cost of the local supply of raw materials to the total costs of production in your company?

4. Please estimate the importance of the local supply of raw materials to production in your company at present.

Firm-Level Cultural Distance [Please indicate the extent to which you agree with the following statements describing the other parents of your company.]

1. There are significant cultural differences between us and the other JV partner.

2. Their national culture is quite different from ours.

3. There is much cultural dissimilarity between us and the other JV partner.

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Performance [Please indicate the extent to which your organization has achieved each of the following organizational objectives (for objectives that are irrelevant to your organization, please choose “not achieved at all”)]. a. Profit. b. Sales in the local market. c. Sales in overseas markets. d. Market share. e. Product quality. f. Acquisition of management skills. g. Technology transfer. h. Promotion of cooperation among the parties involved.

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